Weight (HM Inspector of Taxes) v Salmon
| Jurisdiction | England & Wales |
| Judgment Date | 04 March 1935 |
| Date | 04 March 1935 |
| Court | King's Bench Division |
NO. 950-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income Tax, Schedule E - Emolument of office - Salaried director - Right to take up shares at par value, their market value being considerably higher.
The Respondent was a managing director of a limited company and entitled under a service agreement to a fixed salary. In addition the directors of the company by resolution each year gave the Respondent the privilege of applying for certain unissued shares in the company at their par value, which was considerably less than their current market value; the shares he applied for were duly allotted to and taken up by him, and had, in fact, been retained by him. The earlier resolutions recited that this privilege was granted having regard to the "eminent and special services" the Respondent had rendered to the company, but the resolutions relating to the years covered by the appeal made no reference to his services.
The Respondent was assessed to Income Tax under Schedule E on the basis of the difference between the market value of the shares taken up and the par price actually paid for them. On appeal he contended that he had not received a profit assessable to Income Tax. The Special Commissioners discharged the assessments.
Held, that the privilege granted to the Respondent represented money's worth and was assessable to Income Tax as a profit of his office as managing director.
Stated by the Commissioners for the Special Purposes of the Income Tax Acts under the Income Tax Act, 1918, Section 149, for the opinion of the King's Bench Division of the High Court of Justice.
At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held at York House, 23, Kingsway, London, W.C.2, on 8th May, 1933, for the purpose of hearing appeals, Harry Salmon, Managing Director of J. Lyons & Co., Ltd., hereinafter
called "the Respondent", appealed against the undermentioned assessments made upon him under Schedule E of the Income Tax Act, 1918,viz.:for the year ended 5th April, 1927, in the sum of £7,187 10s.0d.
for the year ended 5th April, 1928, in the sum of £7,968 10s.0d.
for the year ended 5th April, 1929, in the sum of £7,968 10s.0d.
for the year ended 5th April, 1930, in the sum of £9,218 10s.0d.
for the year ended 5th April, 1931, in the sum of £10,312 10s.0d.
for the year ended 5th April, 1932, in the sum of £9,375 0s.0d.
for the year ended 5th April, 1933, in the sum of £8,750 0s.0d.
1. The Respondent was a Managing Director of J. Lyons & Co. Ltd., hereinafter called "the Company", and was employed under a service agreement at a salary of £6,500, free of Income Tax, which was increased as from 31st March, 1929, to £7,280 free of tax. There were other Managing Directors employed under similar agreements, and assessments had been made on those Directors similar to the present assessments, and were also under appeal to us at the same time.
2. The authorised capital of the Company was £9,925,000.
The issued share capital of the Company at March, 1933, was as follows:-
400,000 ordinary shares |
400,000 |
1241,273 "A" ordinary shares |
1241,273 |
647,065 5 per cent. cumulative preference shares |
647,065 |
5000,000 7 per cent. cumulative preference shares |
5000,000 |
1000,000 8 per cent. cumulative preference shares |
1000,000 |
466,667 6 per cent. preferred ordinary shares |
466,667 |
500,000 proportional profit shares |
500,000 |
450,000 "B" proportional profit shares (10s. each) |
225,000 |
Total |
£9,480,005 |
3. A copy of the Memorandum and Articles of Association of the Company is annexed to and forms part of this Case, and is marked "A"(1).
Article 100 provides as follows:-
The remuneration of a Managing Director shall from time "to time be fixed by the Directors, and may be by way of "salary, or commission or participation in profits, or by any or "all of these modes.
The Respondent's service agreement was entered into under this Article, and a copy of the existing agreement, together with a copy of the resolution endorsed thereon, is annexed to and forms part of this Case(1).
4. Article 6 of the Company's Articles is in the following terms:-
The shares shall be under the control of the Directors, "who may allot or otherwise dispose of the same to such "persons on such terms and conditions, either at a premium "or otherwise, and at such times as the Directors think fit.
5. Resolutions have been passed from time to time by the Directors of the Company giving to the Managing Directors the opportunity of subscribing for the "A" ordinary shares of the Company at par.
The following are extracts from the minutes of the Directors dealing with the matter in years preceding the years to which the appeal relates.
Resolved that having regard to the eminent and special services involving an abnormal amount of work rendered by Mr. Alfred Salmon, Mr. Isidore Salmon and Mr. Harry Salmon, the three Managing Directors of the Company, during the financial year of the Company which ended on 31st March last, each of them be permitted to make application for and to take up at par one thousand "A" ordinary shares in the capital of the Company.
The Assistant Secretary pro tem produced applications for 1000 "A" ordinary shares from each of the Managing Directors, Mr. Alfred Salmon, Mr. Isidore Salmon and Mr. Harry Salmon pursuant to the minute of the 9th instant and it was resolved that one thousand "A" ordinary shares in the capital of the Company numbered 84911 to 85910 be and are hereby allotted to Mr. Alfred Salmon. Mr. Alfred Salmon did not vote on this and the two following resolutions.
Similar resolutions for Mr. Isidore Salmon and Mr. Harry Salmon.
Messrs. A. Salmon, I. Salmon and H. Salmon having each applied for 1000 "A" ordinary shares at par it was resolved that having regard to the eminent and special services rendered by them during the financial year of the Company ended March 31st, 1921, the shares be and are hereby allotted to them on the terms of such applications and that certificates be issued accordingly.
The Directors having intimated to the three Managing Directors that the privilege previously accorded them of applying for an allotment of "A" ordinary shares at par would be repeated applications by these gentlemen for 2000 "A" ordinary shares each at par were produced by the Secretary and it was resolved that having regard to the eminent and special services rendered by them during the financial year ended March 31st, 1922, the shares be and are hereby allotted to Messrs. A. Salmon, I. Salmon and H. Salmon respectively on the terms of such applications and that certificates be issued accordingly.
The Directors having intimated to the three Managing Directors that the privilege previously accorded them of applying for an allotment of "A" ordinary shares at par would be repeated applications by these gentlemen for 2000 "A" ordinary shares each at par were produced by the Secretary and it was resolved that having regard to the eminent and special services rendered by them during the financial year ended March 31st, 1923, the shares be and they are hereby allotted to Messrs. A. Salmon, I. Salmon and H. Salmon respectively on the terms of such applications and that certificates be issued accordingly.
The Directors having intimated to the three Managing Directors that the privilege previously accorded to them of applying for an allotment of "A" ordinary shares at par would be repeated applications by these gentlemen for 2000 "A" ordinary shares each at par were produced by the Secretary and it was resolved that having regard to the services rendered by them during the financial year ending March 31st, 1924, the shares be and are hereby allotted to Messrs. A. Salmon, I. Salmon and H. Salmon respectively on the terms of such applications and that certificates be issued accordingly.
The Directors having intimated to the three Managing Directors that the privilege would again be accorded to them of applying for 2000 "A" ordinary shares each at par applications from each of them for that number of shares were produced by the Secretary and it was resolved that the shares be and are hereby allotted to Messrs. A. Salmon, I. Salmon and H. Salmon on the terms of such applications and that the certificates be issued accordingly.
The following are the entries in the minutes relating to the years in question in this appeal containing the resolutions of the Directors and recording the applications of the Respondent for "A" ordinary shares. A copy of his application for shares for the year 1926 is attached to the Case and marked "B"(1); the applications for other years were in similar terms.
Resolved that the three Managing Directors be accorded the privilege of applying for 2500 "A" ordinary shares each at par. Messrs. I. Salmon and H. Salmon did not vote on this resolution.
The Secretary produced applications from the three Managing Directors for 2500 "A" ordinary shares each at par in accordance with the minute of the 3rd instant and it was resolved that the shares be and are hereby allotted to Messrs. A. Salmon, I. Salmon and H. Salmon on the terms of such applications and that the certificates be issued accordingly.
Resolved that the three Managing Directors be accorded the privilege of applying for 2500 "A" ordinary shares each at par. Messrs. A. Salmon, I. Salmon and H. Salmon did not vote on this resolution.
The Secretary produced applications from the three Managing Directors for 2500 "A" ordinary shares each at par in accordance with the minute of the 26th ultimo and it was resolved that the shares be and are hereby allotted to Messrs. A. Salmon, I. Salmon and H. Salmon on the terms of such applications and that the certificates be issued...
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